Tax Reform Resources

Additional resources from a coalition convened by the American Council on Education, including tools to help you contact Congress about how
H.R. 1 affects charitable giving and endowments; students and families; campus employees; and higher education finance is available at
ACE website.

Resources on the Impact of the Elimination of the State and Local Tax Deduction (SALT)

Summary Points

Provisions of H.R. 1 Affecting Higher Education

Limitation on Deductibility of State and
Local Taxes – Under current law, taxpayers may deduct their payments of State and local taxes (the so-called “SALT”) from their incomes when calculating their Federal income tax. The bill would allow deduction only of real property taxes (but not income or personal property taxes), up to a limit
of $10,000 ($5,000 for married individuals filing separately). The loss of deductibility of State and local income taxes, and of property taxes above $10,000, could affect the ability of States and localities to tax residents for education as well as make it even more challenging for states to generate
revenue to support higher education.
New Link

Consolidation of Higher Education Tax Credits
– Currently, taxpayers may claim a credit for postsecondary education expenses using one of three tax credits – the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit, and the Hope Scholarship Credit – each with its own rules and conditions. The bill would merge these three authorities
into a consolidated AOTC, which, as under the current AOTC, would provide a 100 percent credit for the first $2,000 of qualifying higher education expenses (tuition, fees, and course materials) and a 25 percent credit for the next $2,000. In addition, while the current AOTC is available for only four years of
higher education, the bill would allow a fifth year, but at only half the rate of the first four years.

As under current law, the AOTC could phase out for higher-income tax-filers. Also, as under current law, up to $1,000 of the AOTC for the first four years of higher education would be refundable; for the new fifth year, up to $500 would be refundable. In addition, individuals who do not
have a work-eligible Social Security number (i.e., undocumented immigrants who previously would have been able to file with an Individual Taxpayer Identification Number) would no longer be able to claim the credit.

Excise Tax on Private College Endowments’
Investment Income – The bill would create a tax of 1.4 percent on the net investment income of private colleges’ endowments. The tax would cover only private colleges and universities that have at least 500 students and have assets (other than those used directly in carrying out the institution’s
educational purposes) of at least $100,000 per student. Public institutions of higher education would not be impacted by this provision.

Exclusion of Income Resulting from the
Discharge of Student Debt – Under current law, student loan debt that has been forgiven as a result of death or disability constitutes taxable income. The bill would exempt from income any debt forgiven as a result of death or total disability.

Repeal of Certain Higher-Education-Related
Deductions and Exclusions – The bill would eliminate five additional deductions or income exclusions that support higher education. They are:

The
Deduction for Interest Paid on Student Loans – Under current law, a taxpayer may receive a deduction for interest payments on student loans taken out for higher education expenses of the taxpayer or the taxpayer’s spouse or dependents. The deduction is phased out for higher-income filers.

The
Exclusion of Income from Savings Bonds Used to Pay Education Expenses – Under current law, a taxpayer may exclude from income savings bonds that are used to pay qualified higher education expenses. The exclusion is phased out for higher-income filers.

Exclusion
of Tuition Reductions – Under current law, tuition reductions that institutions of higher education provide to their employees and those employees’ spouses and dependents (in the form of either reduced tuition or cash) are excluded from the employees’ income. The reductions must be part of a
tuition reduction program that does not preference highly compensated employees and does not apply to graduate students (except those who serve as teaching or research assistants).

Exclusion
of Employer-Provided Education Assistance – Under current law, up to $5,250 per year of employer-provided education assistance for undergraduate or graduate education is excluded from income. This assistance must be provided under a plan that does not discriminate in favor of highly-compensated
employees.

Revision of the Deduction for Charitable
Contributions and of the Standard Deduction – Under current law, tax-filers who itemize deductions may take deductions for their contributions to charities, subject to certain limitations, including the “Pease limitation,” which reduces the overall level of deductions claimed by a higher-income filer,
and a general cap of 50 percent of an individual’s adjusted gross income (AGI) that may be deducted. The bill would eliminate the Pease limitation and raise the cap on deductions for charitable contributions to 60 percent of AGI.

Taxpayers do not receive a deduction for charitable giving if they take the standard deduction instead of itemizing. The bill would almost double the standard deduction, for instance from $12,700 to $24,000 for joint filers. Because many more people would take the standard deduction, and
thus would not receive a tax benefit from making charitable contributions, the bill could have a negative impact on charitable giving, including giving to institutions of higher education.

Elimination of the Deduction for
Contributions Made to Obtain the Right to Purchase Seating at an Athletic Event
– While in general a taxpayer may not take a deduction for a charitable contribution to the extent that he or she receives a benefit in return, under current law, a tax-filer may deduct 80 percent of a contribution made to an institution of higher education to secure the right to purchase a ticket at an
athletic event in a stadium at that institution. The bill would end this deduction.

Elimination of the Deductibility of State and Local Taxes – Under current law, taxpayers may deduct their payments of State and local taxes (commonly known as “SALT”) from their incomes when calculating their Federal income tax. The Senate proposal would disallow the deduction of those taxes.
The loss of this deduction could affect the ability of States and localities to tax residents for education.

By comparison, the House bill would allow deduction of real property taxes (but not income or personal property taxes) up to a limit of $10,000 (and $5,000 for married individuals filing separately).

Excise Tax on Private College
Endowments’ Investment Income – The bill would impose a tax of 1.4 percent on the net investment income of private colleges’ endowments. The tax would affect only private colleges and universities that have at least 500 students and have assets (other than those used directly in
carrying out the institution’s educational purposes) of at least $250,000 per student. Public institutions of higher education would not be affected by this provision. The same provision is included in the House bill.

As in the House bill, for the purpose of calculating the amount of this new excise tax, the assets and investment income of a “related organization” would be treated as the assets and investment income of the affected educational institution. A related organization would be defined
as an entity that is controlled by the institution, is controlled by an individual who controls the institution or is affiliated with the institution under other provisions of the tax code.

Revision of the Deduction for
Charitable Contributions and of the Standard Deduction – Under current law, tax-filers who itemize deductions may take deductions for their contributions to charities, subject to certain limitations, including the “Pease limitation,” which reduces the overall level of deductions claimed by a
higher-income filer, and a general cap of 50 percent of an individual’s adjusted gross income (AGI) that may be deducted. The bill would eliminate the Pease limitation and raise the cap on deductions for charitable contributions to 60 percent of AGI. The same changes are included in the House bill.

Taxpayers do not receive a deduction for charitable giving if they take the standard deduction instead of itemizing. The bill would almost double the standard deduction, for instance from $12,700 to $24,000 for joint filers, and the amounts would rise with inflation. The House bill
includes the same provisions. Because many more people would take the standard deduction, and thus would not receive a tax benefit from making charitable contributions, the bill could have a negative impact on charitable giving, including giving to institutions of higher education.

Elimination of the Deduction for
Contributions Made to Obtain the Right to Purchase Seating at an Athletic Event
– While in general, a taxpayer may not take a deduction for a charitable contribution to the extent that he or she receives a benefit in return, under current law, a tax-filer may deduct 80 percent of a contribution made to an institution of higher education to secure the right to purchase a
ticket at an athletic event in a stadium at that institution. The bill would end this deduction. The same change is included in the House bill.

Expansion of Section 529 Plans to Cover
Unborn Children – Under current law, taxpayers may establish tax-advantaged “529 Plans” to pay for the costs of postsecondary education, typically for their children or grandchildren. The earnings on funds invested in college savings accounts are not subject to Federal taxation, so long as withdrawals
from those accounts are used for eligible college expenses. As in the House bill, the Senate bill would permit unborn children (children in utero) to be designated as beneficiaries under 529 plans. Unlike the House, the Senate would not expand the definition of “qualified higher education expenses” (the
postsecondary expenses for which 529 plans may be used under current law) to also cover the books, supplies and equipment costs of participation in apprenticeship programs certified by the Department of Labor.

Introduction of an Excise Tax on Tax-Exempt
Organization Executive Compensation – The bill would create a new 20 percent excise tax on compensation in excess of $1 million paid by a tax-exempt organization and to “excess parachute payments” made by such an organization. (The tax would be paid by the organization, not the individual and would affect
private but not public institutions of higher education.) The House bill includes a similar 20-percent excise tax but applies it only to the five most highly compensated employees of a tax-exempt organization and does not apply it to excess parachute payments.

Inclusion of Name and Logo Royalties as
Unrelated Business Taxable Income –Under current law, certain types of income received by nonprofit organizations are exempt from taxation as unrelated business taxable income (UBTI). The bill would include royalty income derived from the sale or licensing of a tax-exempt organization’s name or logo
(including any trademark or copyright related to a name or logo) as UBTI. The House bill does not include such a provision.

Unlike the House bill, the Senate proposal would not consolidate the current higher education tax credits nor would it repeal the exclusion of income resulting from the discharge of student debt in cases of death or total disability, the deduction for interest paid on student loans, the deduction for
tuition and related expenses, the exclusion of interest from savings bonds used to pay education expenses, the exclusion of tuition reductions or the exclusion of employer-provided education assistance.